12,100 cups of chocolate pudding
Procurement is sometimes seen as a dirty word in business. Those in procurement or purchasing are often given a bad rap because procurement can seem to add red tape, produce little value and cause unnecessary bottlenecks. However, a good purchaser will save an organization money while a great one can produce value in the unlikeliest of places. Procurement is not just about cutting costs, when used effectively it can bring strategic value to a company’s competitive advantage. It can be difficult to see the long term benefit and strategic advantage that comes with establishing strong procurement practices but here is a real world example of how an individual was able to take advantage of an awesome approach to procurement and illustrate why procurement matters.
An engineer who teaches at UC Davis, named David Phillips would have received an A+ in procurement for his creative and calculated procurement of pudding. David went on to procure 12,100 cups of pudding for himself and his family in the span of a month. Of course buying an absurd amount of pudding was not David Phillip’s goal. He had a much bigger plan in mind.
In 1999 Healthy Choice was offering 500 air miles to anyone who mailed them 10 barcodes of their product. David found that if the barcodes were mailed in within the first month the promotion would double to 1000 air miles. David’s plan started out by doing research on Healthy Choice products and concluded the most cost effective way of securing 10 barcodes at a time was to procure individual chocolate pudding cups costing $0.25. Buying individual pudding cups was a brilliant sourcing decision as the cost to obtain 10 barcodes became significantly lower than having to purchase other Healthy Choice offerings.
Total cost per 1000 Air Miles = $2.50
After figuring out the most cost effective way to take advantage of the Air Miles deal, David went from store to store buying out entire inventories of individual Healthy Choice pudding. He apparently avoided drawing attention to his strategy by claiming he was stocking up for Y2K. David eventually cleared out all the stores in his area. He was able to procure 12,100 cups of Healthy Choice chocolate pudding for a grand total of $3025.
$3025 = Potential for 1,210,000 Air Miles
The cash value of One Million Air Miles is roughly equivalent to $150,000. With 1,000,000 Air Miles, David would also be granted a lifetime pass to “American Airlines AAdvantage Gold Club” which would grant David and his family the ability to take advantage of special travel deals. The only catch was he still had to peel the barcodes off the cups. In typical David Phillips fashion, he soon grew tired of family time consisting of peeling bar codes off of pudding and secured a deal with the Salvation Army. He offered to donate his pudding collection in exchange for help with the barcodes. Not only did this deal allow David to offload his labor but he was able to write off the pudding as a charitable donation worth $800. David Phillips and his family, through pure procurement maneuvering genius, can now fly around the world for next to nothing.
The cost to his bottom line was around $3000 and the value gained from the endeavour is worth many times the actual amount spent. Imagine if your business was able to see the value of procurement in a similar way as David Phillips.
Now tell me that procurement doesn’t bring value to an organization.